Covid-19 and taboo fiscal policy



The recent controversy circling the statue in Gelsenkirchendid brought to mind a famous quote from Lenin, “There are decades where nothing happens, and there are weeks where decades happen”.

Back in March, The Bank of England’s governor, Andrew Bailey, announced it was prepared to “do what it takes” to safeguard the UK’s economy from the worst effects of the corona virus. Speaking on Sky News earlier this week, he talked about what he believed would have happened had the Bank not intervened, “I think the prospects would have been very bad. It would have been very serious… I think we would have a situation where in the worst element, the government would have struggled to fund itself in the short run,” Bailey added.

Low interest rates left the BofE with little ammunition, printing money was the last resort; so they bought up billions of pounds in government assets from banks and institutions to stimulate lending and investment spending. This does work, sort of –it depends who you ask. The fallout of this drastic action can last decades; and we’ve lived through the side effects of quantitative easing before. The triggered increase in bond prices pushes up the cost of defined benefits pensions along with the housing market and there’s no guarantee QE prevents a double dip recession like we dropped into in 2012. Many economists suspect QE to be the culprit behind business cycles, yes – job creation is key to sustaining the economy however the boom of employment is short lived once the bond buying stops and lenders stop lending, business contracts and workforces are cutback again.

And who does QE really help? The virtual money cooked up in our central bank will never go into circulation, and it only really benefits banks and asset holders, there’s no trickle feed down to wider British society. If we’re going to shock the flat-lining economy back to life with both paddles, why not look at the other last resort –helicopter money? Coined by American Nobel prize-winning economist Milton Friedman, helicopter money is a monetary policy that involves printing large sums of money and distributing it to the public, either directly or through the government. Picture a helicopter of policy makers dropping wads of central bank generated cash upon grateful citizens in order to starve off depression. It’s radical and somewhat unconventional but the money stays in circulation, and in a world that suddenly finds itself in the midst of an unprecedented health crisis, policy makers need to mobilize on their fiscal policy, fast. 

Under heavy depression a money-drop is unlikely to cause harmful inflation (given the amount isn’t excessive) and instead feed directly into consumer spending, the left ventricle of our country’s economy. Australia already have the policy on the table, the Reserve Bank of Australia has bought more than $30 billion of federal and state government bonds to stabilize and reduce volatile government bond yields. Economist Andrew Charlton, who advised Kevin Rudd during the global financial crisis, says the risky strategy where money is printed and pumped to households might have to be considered. 

There’s some dispute over the interpretation of Friedman’s 1969 paper entitled “The Optimum Quantity of Money”, for instance the US has been perceived as using a form of helicopter money when it introduced a 2.2-trillion-dollar bill known as the Corona virus Aid, Relief, and Economic Security (CARES) Act; millions of eligible US residents have been receiving 1,200-dollar stimulus checks to help them cope with the financial effects of the Covid-19 crisis, however this isn’t technically helicopter money since the federal government handing out these checks are using tax resources to pay them. Helicopter money is a rescue package, but has to be created by the central bank.

While Covid is still out there making its own rules there’s an opportunity for economists, banks and legislators to legitimately break a long-lived taboo and front up to an unconventional money-financed fiscal stimulus. There’s little appetite for a taxation deferral plan that would lead us back to the ‘austerity saga’, let alone a debt mountain to face down the line. Not this time. To sustain the economy we need money changing hands, the velocity of money in circulation is more important than the amount of money injected.  A Covid policy committee could be formed of equal representatives from the treasury and the Bank of England along with experts and esteemed economists. Emergency legislation would need to be passed authorizing the central bank a period in which to enact the policy. 

One practical way to distribute money to the private sector is to give cash to all individuals, however not everyone has a bank account or fit criteria for tax rebate. In China, local governments have stimulated business using digital spending coupons. These have been distributed by third parties, however it’s arguable that something similar could be centralized either digitally or through tangible vouchers. Quantitative easing propped up the economy going into lockdown, now we need a new tool to take us out, to recuperate trust in financial markets and boost consumer spending. I sympathize with the critics; these are ‘for emergency use only’ policies, yet Britain hasn’t faced economic hardship like this for 300 years. We owe it to ourselves to have this conversation.

And as the bank of England looks to flog gilts back to the public sector, I can’t help but wonder; why stuff gilts in mattresses when we could be throwing money out of helicopters?

Charlotte Salomon is the Deputy Chair of Saffron Walden Conservative Association. Follow her on twitter: @SalomonSoup